I get emails from many subscribers about how best to generate a reliable income stream that accompli...
Energy Trusts a Reliable Gusher
05/11/2012 11:45 am EST
Some are paying very high yields amid the onshore drilling boom, says Bryan Perry, editor of Cash Machine. He also likes floating-rate funds.
Bryan, obviously income is something that many investors are seeking, particularly in their retirement portfolios. What should people be doing?
Well, certainly we’re at the S-curve now for retirees in the US, where more and more people are having to depend on their retirement funds.
And with interest rates at historic lows, they’re having to look around for alternatives other than the usual CDs and money markets and Treasuries, and all those things that are all paying less than 4%. Because when you adjust for inflation at 3.5%, and pay your taxes, that’s a zero-sum ballgame; zero-sum returns.
So at Cash Machine, I look for high yield in very different sectors; a lot of different sectors, a lot of non-correlating assets. You don’t want everything in the same area in case something gets hit. You want to make sure that you have other things that are offsetting that.
So the main areas that I focus on are corporate bonds—high-yield corporate bonds, which are paying on average in the ETF area around 10%. I have three or four of those in our portfolio.
I have what are called Energy Income Trusts. One of the big themes in the US right now is onshore oil and gas exploration, because of new technologies, horizontal drilling and hydraulic fracking. We’ve been able to uncover 100 years’ worth of new reserves that we couldn’t get at before, not even five years ago.
So now with the Bakken Shelf, the Permian Basin, Eagle Ford, Marcellus Shale—these are all huge, rich deposits now, and there are certain income trusts out there that are paying 9%, 10%, 11%... SandRidge Permian Basin (PER), SandRidge Mississippian (SDT).
We’ve got a couple of others in the MLP sector that are basically a play on the entire sector. The Cushing MLP Total Return Fund (SRV) pays 9.5%, and you’re starting to cast a net over all the MLPs. It’s a wonderful way to get monthly income and not have to be a stock picker in the sector, but you have exposure there,
I find it to be very compelling to be in the domestic onshore business, because we’re downsizing our military—we can’t fight a two-theater war anymore over there in the Middle East—and we want to be able to create good jobs. These are really good jobs that come out of the energy business.
They’re not seasonal; they’re not baristas at Starbucks (SBUX) with an MBA. We have good-paying jobs in an area where we are becoming more energy dependent at home here. I think that it’s a win/win. We’re not in the Gulf of Mexico—this is onshore drilling and gas, and you don’t have that exposure to a BP (BP) disaster. So that’s another area that I like very much.
I’m also starting to buy floating rate. I think right now rates can only go up—the only thing that can go lower then floating rates is the public opinion of the US Congress, and that’s getting pretty down there, at 10% right now and going lower.
So I think right now we have a really compelling case for starting to look at the bond market going in the other direction here in the next two years. I think at the 2% marker, where the ten-year bond is right now, that’s about as low as we’re going to see unless we double dip, and then we can see maybe 1.5%.
But right in here, you can buy floating-rate exchange traded funds from Nuveen and from Franklin Templeton that are paying around 7.5%. And they are adjusted to the LIBOR, London Interbank Overnight Rate, so if rates do start to move up, the interest rate on these funds also rises, because they’re tied to the short-term interest rate funds.
So your principal stays intact, but your dividends are going up. It’s like buying TIPS—you know, the Treasury-indexed funds—but those only pay less than 1% right now, or 2%.
I want to be in 6% or 7% money, where people can actually make a return and pay their bills and be in a well-managed fund, pays monthly, and buying them at a discount to net asset value. It’s a really nice way to start laying the groundwork for inflation down the road.
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